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Hans-Werner Sinn, Professor of Economics and Public Finance at the University of Munich, is President of the Ifo Institute for Economic Research and serves on the German economy ministry’s Advisory Council. He is the author, most recently, of The Euro Trap: On Bursting Bubbles, Budgets and Beliefs.

MUNICH – Game theorists know that a Plan A is never enough. One must also develop and put forward a credible Plan B – the implied threat that drives forward negotiations on Plan A. Greece’s finance minister, Yanis Varoufakis, knows this very well. As the Greek government’s anointed “heavy,” he is working Plan B (a potential exit from the eurozone), while Prime Minister Alexis Tsipras makes himself available for Plan A (an extension on Greece’s loan agreement, and a renegotiation of the terms of its bailout). In a sense, they are playing the classic game of “good cop/bad cop” – and, so far, to great effect.

Plan B comprises two key elements. First, there is simple provocation, aimed at riling up Greek citizens and thus escalating tensions between the country and its creditors. Greece’s citizens must believe that they are escaping grave injustice if they are to continue to trust their government during the difficult period that would follow an exit from the eurozone.

Second, the Greek government is driving up the costs of Plan B for the other side, by allowing capital flight by its citizens. If it so chose, the government could contain this trend with a more conciliatory approach, or stop it outright with the introduction of capital controls. But doing so would weaken its negotiating position, and that is not an option.

Capital flight does not mean that capital is moving abroad in net terms, but rather that private capital is being turned into public capital. Basically, Greek citizens take out loans from local banks, funded largely by the Greek central bank, which acquires funds through the European Central Bank’s emergency liquidity assistance (ELA) scheme. They then transfer the money to other countries to purchase foreign assets (or redeem their debts), draining liquidity from their country’s banks.

Other eurozone central banks are thus forced to create new money to fulfill the payment orders for the Greek citizens, effectively giving the Greek central bank an overdraft credit, as measured by the so-called Target liabilities. In January and February, Greece’s TARGET debts increased by almost €1 billion ($1.1 billion) per day, owing to capital flight by Greek citizens and foreign investors. At the end of April, those debts amounted to €99 billion.

A Greek exit would not damage the accounts that its citizens have set up in other eurozone countries – let alone cause Greeks to lose the assets they have purchased with those accounts. But it would leave those countries’ central banks stuck with Greek citizens’ euro-denominated TARGET claims vis-à-vis Greece’s central bank, which would have assets denominated only in a restored drachma. Given the new currency’s inevitable devaluation, together with the fact that the Greek government does not have to backstop its central bank’s debt, a default depriving the other central banks of their claims would be all but certain.

A similar situation arises when Greek citizens withdraw cash from their accounts and hoard it in suitcases or take it abroad. If Greece abandoned the euro, a substantial share of these funds – which totaled €43 billion at the end of April – would flow into the rest of the eurozone, both to purchase goods and assets and to pay off debts, resulting in a net loss for the monetary union’s remaining members.

All of this strengthens the Greek government’s negotiating position considerably. Small wonder, then, that Varoufakis and Tsipras are playing for time, refusing to submit a list of meaningful reform proposals.

The ECB bears considerable responsibility for this situation. By failing to produce the two-thirds majority in the ECB Council needed to limit the Greek central bank’s self-serving strategy, it has allowed the creation of more than €80 billion in emergency liquidity, which exceeds the Greek central bank’s €41 billion in recoverable assets. With Greece’s banks guaranteed the needed funds, the government has been spared from having to introduce capital controls.

Rumor has it that the ECB is poised to adjust its approach – and soon. It knows that its argument that the ELA loans are collateralized is wearing thin, given that, in many cases, the collateral has a rating below BBB-, thus falling short of investment grade.

If the ECB finally acknowledges that this will not do, and removes Greece’s liquidity safety net, the Greek government would be forced to start negotiating seriously, because waiting would no longer do it any good. But, with the stock of money sent abroad and held in cash having already ballooned to 79% of GDP, its position would remain very strong.

In other words, thanks largely to the ECB, the Greek government would be able to secure a far more favorable outcome – including increased financial assistance and reduced reform requirements – than it could have gained at any point in the past. A large share of the acquired resources measured by the TARGET balances and the cash that has been printed would turn into an endowment gift for an independent future.

Many people in Europe seem to believe that Varoufakis, an experienced game theorist but a political neophyte, does not know how to play the cards that Greece has been dealt. They should think again – before Greece walks away with the pot.

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Guest PatrickT

Guest PatrickT

As usually a bullshit article. Vroufakis is absolute incompetent and nobody has even the slightest respect for him. That said his plans failed since germany ignores it. What debates can you have when germany stands 100% firm on its position? There is no room for any debate.

I also find it interesting how you greeks think that others should pay you for living. Do you want become a parasite forever? Don´t get me wrong but something that can´t survive on its own should die.

Regarding the scenario above it should be noted that it is not chancellor Merkel who is against help for greece. Its the german people. If chancellor Merkel would agree to any further help for greece her chancellory would end.

Greece as a nation must be destroyed since it is unable to sustain itself. And build up new. Salvation through destruction.

You also overestimate the greek problem for us. Your debt is peanuts. As Merkel said, a default would be a non issue for us, but would bomb greece back into the stoneage.

But what is really funny is how your article tries to sugarpaint the current bank run in greece as something positive. Thats my business comrade and i can guarantee you, that greece is currently collapsing. Greek banks are cut off rom most refinancial options. The greek state is virtually bancrupt and milks evry money scource. They even ordered museums and small offices to send evry money they have. The greek state does not pay its contractors anymore. It has open bills worth 4 billion €. It doesn´t even refund the VAT to the merchants anymore.

Because of this each day alone 65 greek business are shut down, several thousand new unemployed join the statistic each single day and the banks have a gargantuan capital loss they can barely compensate anymore.

The greek nation is in its death and i can guarantee you that there is no Plan A, there is no Plan B. The current regime is driven by the daily events and acts without any plan or competence at all.

That said, good luck. Your people can need it.

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This article doesn't make much sense to me either, but seeing that it's written by a German professor of economics with pretty strong credentials I'm assuming that he knows much more than I do around global finances.

Either way, the next couple of weeks are going to be critical for Greece and for Europe.

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Guest eyoismos

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According to a poll conducted jointly by the Financial Times Deutschland and the Verein für Socialpolitik (the German economics association) among 550 German economics experts in 2006, “only two representatives of our profession exert an appreciable influence on policymaking: Bert Rürup and Hans-Werner Sinn”. A study in 2007 placed Sinn, in terms of number of citations in scientific journals, second to German Nobel laureate Reinhard Selten. The British newspaper The Independent named Sinn among the ten most important people who changed the world in 2011.

The German Business weekly WirtschaftsWoche ranked Sinn 62 among the 100 most powerful people in Germany, and placed him in the No. 1 position among the “Most Important Economists” in the country. In 2012, he was included in the 50 Most Influential list of Bloomberg Markets Magazine. In 2013, the Frankfurter Allgemeine Zeitung placed Sinn first on their list of economist with most political influence

while patrick is a .... oh wait ....he is a nobody , while still fresh out from his nappies, with such "authority" about bullshit articles, and everybody barely tolerates his chirping, while he sits there smugly in his playpen

as for the said article ... it falls square in the middle of what i always talk about ... the broader hidden picture of what is going on out there, while us every day joe soaps, blind as bats, are left wondering about probable scenarios and possible conspiracy theories

having said that.... i agree completely with admin ... don't quite understand it and a dare say even doesnt make sense under normal "circumstances". i have read this article over and over and i cant seem to grasp it

i havent a clue if its true or false or even valid, but is there anybody out there who can explain and expand on what he is on about? does his theory hold water? or is this just another "chess move" in the game theory, and Sinn another player?

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Guest PatrickT

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Sinn makes no sense at all, since and this is based on reality. Greece is dieing and Sinn thinks there is any deeper plan involved.

Thats like saying the sinking of the Titanic was planned from the shipping lines to create a myth so the passenger shipping could transform from passenger transport in the classical way to crusing for joy and survive the invention of the airplane.

And Eyosismus63hwhatever, for a nobody i have quite some insight and qualification regarding this stuff.

And i can base it on my qualification.

That said i can assure you that Sinn is not involved in any plans or politics at all. He leads the ifo institute, which was pushed out of decission making. Since then Sinn goes rampage.

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Guest eyoismos

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and there you are ladies and gentlemen, the ultimate in audacious arrogance ...

the gerbil, with an effectively "beginners level" BSc no less, ....while running on his gerbil wheel in his cage of his masters, declaring that he has uber pwed a Professor of Economics and Public Finance, and who serves on the German economy ministry’s advisory council ... an economy ministry that has managed to put germany in the place that it is, an economic powerhouse in europe

ironically hilarious

no wonder i cant take this guy seriously ...

i mean ...after all ... he even went as far as quoting a tosser in turkey who had this telekinesis theory, to justify his often contradictory juxtapositional arguments

keep it coming, though, dude ... you might end up staring in Comedy Central one day

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Guest eyoismos

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by the way ...that is no reflection on your achievement ... degrees dont come easy - it takes hard work and dedication to achieve it, let alone further educational achievements that i presume you endeavor to achieve one day

but spare us the arrogance - its only ugly

if you are going to trash somebody like Sinn ... on a minor forum no less ...at least have the gall to not use broad sweeping statements of total rejection and at least justify your claims and justify your degree

that at least, would give you some level of credibility

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Guest PatrickT

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Sinn is contradicted by reality. We see that greece as a nation is collapsing. It can´t pay its bills and that collapse is visible in evry aspect of that nation. Greece and its officials simply have no room for any plans and games. Thats the sad reality.

Sinn was shamed in public from Schäuble not that long ago and thats for a reason.

Since the 17-member euro area’s debt crisis erupted in 2010, Sinn has been center stage in the public debate. In speeches, television interviews and testimony before parliament, he has argued for a stricter stance on handing out German taxpayers’ money. The European Union should have let Greece default when it first ran into trouble at the end of 2009, he says.

sounds awfully like a "hard core" economic right winger "gone in selective mode" to me

(and dont be foolish enough to think i support him or oppose him either)

sounds to me, based on all you have uttered so far on this forum, you should probably be his greatest supporter

something certainly does not add up here

oh ...and by the way you call them personal insults, but i call them an allegory,

for in the greater scheme of things , you are what i just just said

(not that i am any different ...but at least i recognize it.... you? not so much)

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Guest eyoismos

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the article pretty much sums up what i said. Sinn is on a self promoting tour. He is critisized from decission makers and his simplistic theories do not help in any way.

seriously? is that all you saw in the article? i saw a whole lot more

a) yes, i agree with you, it seems like he is a bit of an attention whore, but then so many others of high profile are the same. hell, one can even put varoufakis in the same category ...but then there are so many bloody idiots who make an issue of ties and scarves and god knows what else.... we ar talking media now .... and the whole world of morons swallows it hook line and sinker

best way to describe "it", "it" beig the article, is what one commentator said, and i quote

I am not sure what this ad hominem article seeks to achieve. Prof Sinn would surely be flattered to think that he, Godlike, is creating problems that might otherwise not exist but for his intervention and theories.

c) brings to the for one indisputable fact, that Sinn is a major influence, both to the general public, and to the policy makers out there, often to the dislike of the same

d) he has been shown to be wrong, and yes, often enough, but by the same token has often been proven 100% correct in other cases. which only implies one thing, that to discard what he might come up with, just on the basis of where he has been wrong , would be outright foolish

and the above is just a sample of what i gathered from the article in question

then i see, in the greek newspapers and article by Wolfgang Munchau of the spiegel that somehow / sort-of / maybe supports Sinn's opinion as per the original post by dino. - unfortunately the original article in in german so i couldnt vouch that the translation is accurate or not - but the central core is that Sinn and what he says might have some basis ...which, by the way, i still dont understand or grasp of how it works

but one thing i do know .... and what i always say .... there is a bigger picture out there... much bigger picture, which us plebs are only getting little "instagram pictures", so to speak, of what is going on, and so much so that its only "pictures" that we, as the common folk, are allowed to see

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Guest PatrickT

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What you fail to understand is, that germany will never do anything against its own interests. Greece is an important pawn in that area. Syriza on the other hand is not. What you see here is nation building.

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Guest eyoismos

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of course i realize that germany will not do anything against its own interests (if she is allowed to have a choice .... and by all accounts... quite a few , from various countries, are now seriously raising objections ... irrelevant if they have the power or not)

of course i realize greece is but a pawn - it always has, since Independence from the ottomans, no less

of course i see here a serious attempt at nation building

what you dont realize of refuse to acknowledge, is that there is a distinct possibility that Germany is also a piece in the chess game and that one nation is not an island, especially when part of a broader island called the EU - which would translate to others ALSO being the players... some of which might not even be countries per say .... i can think of one, for example.... its called "capital"

and IF, and that is a big IF, as i am not in the know, Sinn is correct, ....then syriza is a player too. a minion by all standards, but a player nonetheless ... but like i said ..... IF. - on the other hand , maybe Sinn is also playing the media game, like the rest of them damn players ....and only time will reveal the truth .... maybe, if we are lucky .... and by "we", i dont mean greece, but the general populace of europe

again, this not translate to support in any form for syriza. all i know is that everybody, and i mean the players, are gambling with human lives. -

that alone burns me .... but like the old military euphemisms go ... we are dealing with "acceptable losses" and "collateral damage" ... the problem is .....acceptable to whom?

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Guest eyoismos

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look ... we can all go gung ho over theories and theoretical possibilities so ... lets start with the basics

if you take out of the equation the "Attention whore" factor and al lthe rest, including preconceived notions about the guy , and dare i say apparent antipathy towards him ... since you are into that type of game, ie. economics......can you at least try and explain what the fuck Sinn is talking about .... and i am not talking about his conclusions ..which i am very well aware off , as in " conclusions he draws have been fiercely opposed by other economists"

i am talking about his general idea , as in his article mentioned by this post ... how does the whole damn thing SEEM to work?

dumb it down for us laymen

can you do it?

and no ... i am not sarcastic .... i am trying to make sense of it, as i am sure most here on hellenism are too

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Guest PatrickT

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Sinn talks about the target saldos. Greeks have a bank run at the moment. The greeks are in panic and take their money from the banks. The greek banks get refinanced through the ECB and the target saldo. Two years ago we had a similar scenario on cyprus but as you might remember the EU installed capital controls. Minister Schäuble even announced them a few hours before they were put in action. That stopped people from taking all their money from the banks. The russian black oligarchs on the other hand were not able to save their money and large parts of their money was used to save greece.

In other words, germany took the russians money to stabilize cyprus. In greece we have a similar scenario now but no capital controls installed. There is no russian money bunkered in greece, simply because the banking sector is so bad. The people take their money from the banks and send it to other european banks. Be it german, french or italian. That way the bank accounts get drained and the saldo accumulates in the target system.

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Guest PatrickT

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here is another one. i hear germany has AGAIN got involved with corruption, this time with FIFA, via her arms industry, daimler , Volkswagen and Bayer, according to latest reports

here is the question. is corruption and corruptive practices part of the german DNA?

I wonder how Schulz would answer that. oh wait ... its normal business practices ...trading and all that ... (based on his question , and yours, above)

I hope so. We earn billions with it. Greece does corruption the wrong way. This is not about moralistic bullshit. Its about power. I give you a hint. I don´t care about the wellbeing of your people. I care for our own well being. As long as your people are useful, i support help. If they get useless...drop them like a hot potato. I don´t care about corruption. I don´t care about tyrants in the middle east when we profit awith them.

Our chancellor recently invited egypts dictator al-Sisi and made him a military honor meeting. He has ordered executions of thousands of people. But he is a great busines partner.

We sold posion gas to Saddam and gas masks to Iran. So to answer your question yes it is in our DNA, as in evry other human being.

Friedrich Nietzsche called it "the will to power". We have it...you don´t have it. There is no will to power in greece. No will for execellence. I don´t know why but maybe its because 400 years turkish rule. But greeks lack completly the vision to create something great. They have no big projects. They build nothing. This total bancruptcy is not only monetary but also in science and engineering.

Greece never build a satellite. It has no rockets,and no airplanes, no submarines, no particle accelerators, no cars. Simply nothing. It produces nothing. It only consumes. It is an intellctual dead nation.

As for the soccer world cup. We got the world cup by selling weapons to Saudi Arabia. What a sweet deal. We even earned money with that